BNF on SOG Target $1.50 Junior Light Oil Growth Player with Enormous Captured Resource.
Strategic Oil & Gas
is an exploration-focused junior light oil growth company with exposure to an enormous
potential resource in multiple emerging plays at Steen River in northwest Alberta. In sum, management projects one billion barrels of oil in place in the rim of an astrobleme crater, with the Muskeg Stack being the primary target formation where an independent resource
assessment pegs oil in place at 241 mmbbl (vs. current booked reserves of 11.8 mmboe).
Muskeg Stack Development Very Interesting. To date, the company has drilled six
horizontal wells in the Muskeg Stack play with positive results, and wells improving from
initial rates of 340 boe/d (55% liquids) to tests of 650 boe/d (97% liquids) as a result of longer
lateral lengths oriented deeper in the formation that are generating higher rates and oil
content. In sum, we see a de-risked development area of 40 net sections with potential for
120 drilling locations to which we assign resource value of $3.00 per share.
Improving Fundamentals to Support Growth. The company is currently undergoing a full
field rationalization of its facilities and infrastructure to improve the flow of produced oil to
market at an improved cost structure. These improvements, in addition to an increased
emphasis on Steen River production ($39/boe Q2 operating netback), should see the
company generate an average netback of $32/boe in 2014e (up from $21/boe in 2013e).
These netbacks, in association with solid capital efficiencies ($12,500/boed) and conventional
declines in the Muskeg Stack should support growth of over 20-30% annually within cash
flow, and adding to SOG's CAGR of 125% since 2009 (200 boe/d to 5,000 boe/d).
Initiating Coverage with an Outperform Rating and $1.50 Target Price. We believe
that the company's enormous resource potential in addition to impending improvements to
multiple fundamentals has SOG well positioned to continue adding shareholder value. The
stock currently trades in line with the junior light oil growth peers at 4.7x EV/DACF (2014e)
and $58,000/boed versus the peers at 4.2x and $60,000/boed, respectively.